Far East Orchard Ltd Is Selling For Way Less Than Its Book Value: Is It Really Undervalued?

Companies involved with the real estate development business are not the most loved ones in Singapore’s stock market at the moment, as evidenced by some of the low valuations seen in the space.

These may not be a surprise if one were to look at a chart of private property sales over the past five years: Interest in obtaining a private property has been waning amongst buyers.

Low price high value

One such beaten-down real estate company is Far East Orchard Ltd (SGX: O10). At its current price of S$1.62, the share’s trading at less than 0.6 times its tangible book value and offers a dividend yield of around 3.7% (thanks to its annual dividend of S$0.06 per share in 2014).

With its low price-to-tangible book (PTB) ratio and high dividend yield, it’s perhaps worth asking: Is Far East Orchard currently undervalued?

Picking apart value

Far East Orchard is a property developer, property owner, healthcare property manager, hotel manager, and property management company all rolled into one. Through its many associates and joint ventures, the company manages and has interests in properties that are located in Singapore, Australia, Germany, Denmark, Malaysia and more.

According to Far East Orchard’s last audited financial statements (for the year ended 31 December 2014; the company’s fiscal year coincides with the calendar year), it has more than S$1.87 billion in total assets and a healthy balance sheet that is very nearly in a net-cash position (there was S$98.4 million in cash and S$105.7 million in total borrowings).

The company’s strong financial position also means that it actually owns most of its properties and land outright (since little debt is used) and that’s an impressive feat for a real estate company given the high capital requirements in the business.

When we piece all these information together, it’d appear that Far East Orchard really is sitting on assets that are worth far more than what its market capitalisation suggests.

But… there’s always a but

That being said, it’s not uncommon to see real estate companies trading below their book values.

Properties and land are considered very illiquid assets. Because of that, it may make sense for investors to demand a discount from a real estate company’s asset value when investing in the firm in the event that the assets the company owns can’t deliver returns for shareholders in the future.

This is especially true in an environment where the property market is soft (which is what we’re experiencing now), resulting in the possibility that properties and land that are owned by a company would have a harder time being translated into profits for shareholders.

Foolish Summary

For all the above reasons, there’s a case to be made for Far East Orchard to not be deemed as truly undervalued despite the fact that the company’s shares have a PTB ratio of only 0.6.

Unless a shareholder is able to take over the entire Far East Orchard and liquidate all its assets at a price that meets or exceeds their reported value on the firm’s balance sheet, there’s little chance that investors can see maximum value being extracted from the company’s stated assets.

As such, any discount that Far East Orchard’s share price carries in relation to its book value may be justified.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.